1. Executive Summary

The positive economic growth recorded since 1994 by the new democratic South Africa is tainted by the widening wage gap between executives and average workers. This has made South Africa one of the most unequal countries in the world.
Average Chief Executive Officer (CEO) remuneration increased by 11.5% a year from 2006 to 2009. An average worker would take 8 years to earn what a CEO earns in a 3 month period (Theuissen, 2010).
Globalisation, company acquisitions and mergers make businesses more complex and challenging to manage. Companies seek to recruit the best managers who demand higher pay (Templetion, 2007).
The involvement of the compensation committee in the setting of the CEOs remuneration may contribute to the higher pay for executives (Reh, 200- ).
South Africa has a high level of low skilled labour. Skilled workers are in high demand to drive economic growth. Also, as technology continues to advance, more skilled workers are recruited to operate the high tech machines and they demand higher wages (Sill, 2002).
The low wage paid to average workers and the large gap between executive compensation and average workers can have negative emotional effects. It also creates tension between employers and employees which may result in external reactions (Mc Clelland, 2008).
Creation of value framework for the remuneration of executives and improved wage structures for the average worker will help narrow the existing wage gap (ASA, 2010).

2. Introduction
The widening gap between executive compensation and that of wage earners attract considerable debate in many parts of the world including South Africa.
In a report, from 1978 to 2011 Chief Executive Officer (CEO) compensation in the US grew more than 725%, significantly more than the stock market and remarkably more than worker compensation, at a meagre 5.7%. The report also show that CEO compensation track the stock market with substantial reduction of CEO compensation following fall in stock market in early 2000s (Mishel,2012).
The trend in South Africa show disproportional increase in the executive compensation compared to wage earners and continue to create greater inequality than ever (Craven, 2009).
This assignment report, analyse the executive compensation in comparison to the wage earners in South Africa, identifying the underlying reasons for wage disparity, consequences of widening wage gap and the strategies to close the wage gap.
Government intervention may go a long way in addressing the imbalance in the executive compensation and the wage earners in order to reduce the inequality.
3. Analysis of Compensation between Workers and Executives
A forensic report conducted by the accounting firm, Computus covered 326 listed South African companies and parastatal corporations. The report showed that the average CEO remuneration had increased by 11.5% a year from 2006 to 2009. In 2009 a CEO would earn R1 million rand within 3month compared with an average worker who would take 8 years to earn the same amount of money. The study showed that there was no conclusive factor determining the compensation of executives as some executives still earned substantial amounts irrespective of company performance (Theuissen, 2010).
Globally pay gaps between executives and entry-level employees has grown. The hardest hit countries are emerging countries like the BRIC nations. The reasons cited for the large pay gap is the globalisation of the market for management talent, companies must pay a premium to retain top management talent (templeton, 2007).
4. Underlying Reasons for Wage Disparities
Between 1973 and 2011, the average worker’s hourly wage increased by only 10.7 per cent (Mishel, 2012). The reason for this could be the difference between skilled and unskilled labour. Managers, among other professionals, demand and receive higher wages due to the demand for their skills and experience (Hlekiso and Mahlo, 2006). Over the past 30 years, the wages paid to skilled workers (those with higher levels of education, ability or job training) has increased dramatically relative to the wages of unskilled workers (Sill, 2002). Employees who also have a postgraduate degree have a higher wage premium than those who do not (Hlekiso and Mahlo, 2006). Skill-biased technical change, globalisation and unionisation are factors contributing to an increase in skill premium (the difference in wages between skilled and unskilled workers).
In less developed countries, low-skilled workers are more abundant than high-skilled workers. When there is an increase in the trade of goods and services with less developed countries, the low-skilled workers in poorer countries put downward pressure on the wages of low-skilled workers in the more developed country. In this way, globalisation and an increased trade with less developed countries can account for an increase in skill premium (Sill, 2002).
Unionisation is another factor considered to play a role in the increase in skill premium. The decrease in the number of employees represented by unions, has lowered wages as these employees no longer receive the higher wage negotiated by the unions. There is also less pressure on non-union employers to raise wages, as the bargaining power of unions and their ability to set labour standards have weakened (Mishel, 2012).
Although globalisation and unionisation have shown some effects to the rise in skill premium, the most favourable theory lies with skill-biased technical change. As advances in technology increase, so does the demand for skilled workers increase, as opposed to unskilled workers; this is referred to as skill-biased technical change (Sill, 2002).
Skilled workers (blue- and white collar workers), are more able to adapt to changes in technology, as they are equipped with experience and further education. This allows them to take advantage of periods of intense progress in technology and within the firm in general (Corsini, ca. 2008). As companies invest in new equipment that embodies new technologies, demand for workers who can use them (skilled workers), has surged. This has resulted in an increase in wages paid to skilled workers. The rise in skill premium can be seen as an effect of rising wages for skilled workers, the subsiding wages for unskilled workers, or both (Sill, 2002).
Between 1973 and 2011, the average worker’s hourly wage has increased by only 10.7 per cent (Mishel, 2012). The reason for this could be the difference between skilled and unskilled labour. Managers, among other professionals, demand and receive higher wages due to the demand for their skills and experience (Hlekiso and Mahlo, 2006). Over the past 30 years, the wages paid to skilled workers (those with higher levels of education, ability or job training) has increased dramatically relative to the wages of unskilled workers (Sill, 2002). Employees who also have a postgraduate degree have a higher wage premium than those who do not (Hlekiso and Mahlo, 2006). Skill-biased technical change, globalisation and unionisation are factors contributing to an increase in skill premium (the difference in wages between skilled and unskilled workers).
In less developed countries, low-skilled workers are more abundant than high-skilled workers. When there is an increase in the trade of goods and services with less developed countries, the low-skilled workers in poorer countries put downward pressure on the wages of low-skilled workers in the more developed country. In this way, globalisation and an increased trade with less developed countries can account for an increase in skill premium (Sill, 2002).
Unionisation is another factor considered to play a role in the increase in skill premium. The decrease in the number of employees represented by unions, has lowered wages as these employees no longer receive the higher wage negotiated by the unions. There is also less pressure on non-union employers to raise wages, as the bargaining power of unions and their ability to set labour standards have weakened (Mishel, 2012).
Although globalisation and unionisation have shown some effects to the rise in skill premium, the most favourable theory lies with skill-biased technical change. As advances in technology increase, so does the demand for skilled workers increase, as opposed to unskilled workers; this is referred to as skill-biased technical change (Sill, 2002).

Skilled workers (blue- and white collar workers), are more able to adapt to changes in technology, as they are equipped with experience and further education. This allows them to take advantage of periods of intense progress in technology and within the firm in general (Corsini, ca. 2008). As companies invest in new equipment that embodies new technologies, demand for workers who can use them (skilled workers), has surged. This has resulted in an increase in wages paid to skilled workers. The rise in skill premium can be seen as an effect of rising wages for skilled workers, the subsiding wages for unskilled workers, or both (Sill, 2002).
5. Executives Pay vs. Typical Workers Internationally
Income disparities between executives and workers they manage are not unique to South Africa there are global trends that depicts this reality. Country | Ratio of payCEO vs. avg Worker | Japan | 11.1 | Germany | 12.1 | France | 15.1 | Italy | 20.1 | Canada | 20.1 | South Africa | 21.1 | Britain | 22.1 | Mexico | 47.1 | Venezuela | 50.1 | United States | 475.1 |
Source: Mano Singham Ratio of Average CEO v. Worker Pay by Country
According to Singham, (2012) CEOs mentioned in the comparison are mainly those from public companies. In the American situation it could be the Dow Jones index companies. The first three leading countries are the United States, Venezuela, and Mexico. South Africa is cited amongst the second category which includes Britain, Canada and Italy. Countries with a least rate are France, Germany and Japan. It is worth noting that the above comparison is not without contestation.
However, what cannot be denied is the fact that internationally there are disparities between CEO pay and that of the workers they manage.
In 2005 the average US CEO earn more in one workday, than what a typical worker earned in 52 weeks. CEO compensation constitutes the sum of salary, bonus, value of stock granted and long-term incentive award payments. The wage of a worker is comprised of the hourly wage of production in a given week (Mishel, 2006). Milholland, (2011) argued that each year as the United States of America celebrates its national labour Day, it is important to remember the achievements and contribution made by the American workers. He further states that this day also offers an opportunity to reflect on the fact that CEOs are earning exceedingly more to workers they manage. In 2011the US official unemployment rate stood at 9.2 per cent. While the U6 which is the real unemployment number was at 16.2 per cent. In America the U6 is considered the most accurate unemployment indicator as it includes the total US labour force. Job seekers, part-time workers and those discouraged to look for employment.
6. Workers Living Wage vs. Executives Pay in South Africa
One of the lessons to be drawn from the recent Marikina tragedy is among other things that South African economy cannot continue to develop on the back of low wages or cheap labour. Marikina demonstrated clearly that there are both difficult and hard choices to be taken to bridge the widening gap between workers living wage and executive pay in South Africa. If the workers’ demand for R12500 per month is unreasonable what can be said about the remuneration CEOs in the sector receive? Certainly R12500 a month is higher then, the current pay levels or the minimum wage for mine workers in South Africa. However, low minimum wages in the mining sector broadly keep mine-workers in unending poverty. In 2011 wage gap between the CEO and the average worker in the mining industry was 390 to 1. Given the above the average worker would need to work 325 years to earn the value of the CEOs’ remuneration in 2011( Amandla 26/27 September, 2012).

Workers wage does not always meet with the rising cost of basic needs such as food, transport, water and electricity. The burden on workers is further made worse by the growing number of unemployed dependants and little social wage or social security guarantees. Living wage has to be commensurate to the needs of the workers. It is a historically constructed image, a relative not an absolute standard which contains culture and social biases. It carries messages about what some people perceive to be just and fair. But in the name of justice, the living wage has perpetual gender inequality and a patriarchal view of the family that has benefited male workers and inflicted harm on female workers (Lamoureux, 2001, pp.1-13). According Ndungu, (2008) since 1995, the real wages have remain fairly moderate between 2000 and 2005, an average monthly earnings stayed constant at between R2000 and R3000. South Africa is largely a country of low skilled labour. It is therefore not surprising that wage differentials in South Africa follow closely with skills level, meaning that the higher the skill required for a particular job, the higher the wages paid. Pay for CEOs rise considerably since the year 2000, between 2005 and 2006 alone executive pay rose by as much as 34%. The executives in South Africa enjoy a disproportionately high level of earning level of earnings in comparison with ordinary workers. However, in certain cases executives have been awarded hefty salaries, bonuses and share options at the same time as the performance of their companies has been on a downward trend. The report goes further to argue that in 2007, the package of CEO increased by an average of 14% from R5.3 million in 2006 to R6.1 million in 2007.
7. Consequences of Compensation Gaps
A small differential between lower levels of employees and upper management can lead to high levels of product quality as quality is influenced by emotional factors within an organisation. Large remuneration differentials can have negative emotional significance on workers. The emotional impact that workers experience can be explained by Distributive justice, which looks at the social comparison of rewards (Cowherd, 1992).
Equity theory suggest that rewards should be distributed according to the level of the individual contribution, it also contains a social component as people will compare their rewards based on their inputs with fellow worker’s input and rewards. If the comparison is inequitable, the employee will change their inputs or request improved outputs (Werner, 2011). With a large focus on executive compensation and transparency of executive compensation, employees become less motivated and productivity levels decrease as inequality grows.
Relative deprivation theory shows that individuals experience deprivation when the rewards they receive differ from that of reference groups. Research in deprivation theory normally focuses on upward comparisons made by lower-status people. If these groups experience deprivation it can lead to external reactions towards social systems such as strike actions (McClelland, 2008).
8. Is The Wage Gap between Executives and Workers Compensation Justified?
Reh (200-) states that as businesses become more complex and challenging to run, the demand for the best executives to run those businesses increase, which results in a higher demand for greater pay. Another reason for such outstanding pay packages is that CEO pay is generally set by the compensation committee, which comprises of other CEOs.
The arguments favouring the exorbitant remuneration of executives, is that these individuals have worked hard to create wealth for their shareholders, who took a risk by investing their money through them (Craven, 2009). The concern is that executives’ compensation is often based on their performance within the company. This could lead to short-term business decisions made to benefit themselves, rather than the organisation in the long run, leaving financial problems in their wake (Williams, 2012).
Reh (200-) mentions that even with performance incentives, such vast rewards do not motivate genuine top performers as they are more motivated by the challenge. In South Africa, however, it is possible for executives to be rewarded regardless of the performance of the companies they are managing. Craven (2009) refers to the example of Eskom, in which its CEO’s salary was increased by 26.7% in 2009, without delivering efficient or affordable service.
Hutton (2010) states that employees should get compensated according to what they contribute, but there should be upper boundaries. The contribution of one person alone does not equate to the success or total profitability of a company. The wage gap between executives and their employees is growing by the year, yet, as Craven (2009) states “these same companies which pay out these first-world salaries to their CEOs expect their employees to accept third-world wages”.
9. HR Strategies to Close the Wage Gap
Executive compensation has received scrutiny from government, shareholders and the public. There is unprecedented pressure to compensate executives equitably within the organisation and ethically in a sustainable manner (Towers Watson, 2011).
Company should improve the application of King III, which is part of the Companies Act, 2008 of South Africa. King III is used for the governance of executive remuneration. In Terms of King III, executives should be paid fairly and responsibly. The company’s board with the assistance of a remuneration committee should put forward the policy of remuneration to the shareholders who are then responsible for the approval of the remuneration policy of executives through non-binding votes (steyn, 2012). King III requires the board to consider the method used for the evaluation of directors performance, either it should be done in house or by independent service providers (SACIA, 2009).
A value framework needs to be created to judge the required remuneration of executives. The framework should take into account items like company size, complexity of the job, nature of the market, the economic climate and specific executive duties. The base pay should be equitable within the organisation and topped up with performance bonuses for both the current year and long term (three to five years). The remuneration boards should be unbiased and empowered to make decisions affecting executive compensation (ASA, 2010).
Companies need to invest in training and mentoring the current staff so that employees have opportunities to be promoted and receive rewards for their efforts. Management and workers need to find innovative ways of adding value to the organisation so that profits can be increased which in turn can be shared with staff through company performance rewards. Companies face a difficult task of securing top talent at a premium price and trying to maintain equity within the company. If governments try to control the compensation of executives it can lead to an exodus of management talent from the country. To reduce the equity gap executives will need to play their part and become ethically and socially responsible (HRfuture, 2011).
10. RECOMMENDATIONS
Countries go through different challenges during their developmental stages. Most countries do experience poverty and income inequality issues over time. Challenges pertaining to income disparities between executives and ordinary workers are not isolated to the developed countries per se, as they also hugely affect the developing and under developed countries as well, in a larger scale as a result of poor economic conditions. South African government need to relook and/or mirror some of the policy reforms that assist in reducing income inequality and enhancing gross domestic product in the South African context. The recommendations that will be discussed below could be utilised to redress the salary gaps.
Education and skills enhancement of employees help to boost their competitive advantage which may prompt companies to consider upping their remuneration as an integral part of the retention strategy. This could be done in different ways, eg through salary adjustments to above median quartile, share incentive schemes, performance bonuses, etc. Such proactive methods would assist in narrowing the gaps that exist between CEOs and average employees whilst positively impacting on the employee morale and productivity.
Laws that enhance growth prospects may help to boost the economy of the country, whilst assisting to reduce income disparities and improving employment opportunities. The government may look into reducing personal taxes and increasing consumption taxes, cross subsidizing personal taxes by wealthier citizens. Because of their remuneration structure, CEOs fall in the wealth category, and as such raising their personal income taxes and reducing the average employee income taxes would assist in narrowing the remuneration gap.
The disclosure of the CEO to employee ratio may limit any potential abuse of salary hikes by the CEOs as such ratio comparison is paramount to determine what would be perceived as fair in an attempt to reduce the disparity gaps of the remuneration. Some consultants recommend that the CEO’s salary should not exceed 20 times that of an average employee (AFL-CIO Office of Investment, 2006).
Adherence to the King 111 report and conforming to its recommendations, in so far as governance of the executive remuneration is concerned, could also ensure that these prevalent disparities are narrowed down as such policies could serve as a watchdog against abuse of allocations of CEOs remunerations (SACIA, 2009). United States of America (US) has adopted a similar approach of developing a watchdog over salary pays, namely National Equal Pay Enforcement Task Force which has made recommendation that would assist to narrow the gap by having salaries regulated through establishment of remuneration governance

CONCLUSION
South African is not viewed in isolation as being the only country that has a huge gap in income disparities between CEOs and average workers. Some of the underlying causes for wage disparities have been discussed, and whether or not the prevalent gap between CEOs and general workers is justified.
Income disparities do cause problems in any one country. Whilst these common problems can be found in many countries, these income disparity problems have a varying intensity level from one country to the other (Theuissen, 2010).
The norms of fairness are prominent to the executive, as it is evident that such decision making process is a top down approach. The executive functions of the CEOs of the organisations, in most instances give them the veto powers to influence salary adjustments and increments both of their own and that of their workers. Evidently, the empirical studies made on such disparities suggest that the CEO’s pays is a key referent in determining the fairness of the remuneration process and the comparison of the CEOs salaries and that of their second, third tier, and down to lower level. (Wade, et al, pp 527-546, 2006)
The CEO to employee pay ratio is said to be a huge concern to investors and shareholders of the companies as such disparities negatively influence the morale and productivity of the employees in general. Furthermore, due to lofty increase over the past three decades of the CEOs remuneration, this has created unsettlements at a level of the investor as such increases do have a bearing effect on the return on equity of investors. Hence the Wall Street crisis could also be attributed to such compensation hikes (AFL-CIO, 2011)
The widening gap of the wage disparities between the CEOs remuneration and that of the general workers is an indication that something needs to be done in order to address these disparities. The income gap is indicated as being too vast between the workers and the executives in South Africa. This is also resembled by the large remuneration differentials that occur over a shortest period for the CEOs, in comparison to a very long period to acquire the same amount of money for the general workers. Understanding the underlying reasons for these wage disputes is critical to find a practical solution to redress these problems. Addressing these income disparities requires the intervention of key players, eg the role of human resources in the workplaces as well as the government.
Most first world countries have gone through the challenges facing South Africa today. The causes that lead these countries to go through these problems and finding practical solutions in the process, that have helped them to minimize the gaps that exist between the workers and the executives, can also be a learning for the South African government and corporate. Such recommendation as revisiting policy reforms in the job market and taxes can assist the government to close these gaps.